Forecasting

Sample Solution

Selected product: Milk

Factors that would impact the demand for milk:

• Price: The higher the price of milk, the lower the demand will be. This is because milk is a price-sensitive good, meaning that consumers are more likely to buy substitutes if the price of milk goes up.
• Income: As people's incomes increase, they tend to buy more milk. This is because milk is a normal good, meaning that people demand more of it as their incomes increase.
• Substitutes: There are a number of substitutes for milk, such as almond milk, soy milk, and oat milk. The availability and price of these substitutes can impact the demand for milk.

Full Answer Section

• Tastes and preferences: Some people prefer certain types of milk over others, such as whole milk, skim milk, or 2% milk. Tastes and preferences can change over time, which can impact the demand for milk.
• Advertising and promotion: Advertising and promotion can increase the demand for milk by making consumers more aware of the product and its benefits.
• Seasonality: The demand for milk tends to be higher in the summer months than in the winter months. This is because people are more likely to consume dairy products in the summer, such as ice cream and yogurt.

Forecasting method:

A simple forecasting method that could be used to forecast the demand for milk in a future month is the moving average method. The moving average method takes the average of the demand for milk in the previous few months to forecast demand in the future month.

Variables needed to calculate a forecast:

To calculate a forecast using the moving average method, the following variables are needed:

• Demand for milk in the previous few months: This data can be obtained from historical sales data.
• Number of months to include in the moving average: The number of months to include in the moving average depends on the specific product and industry. For milk, a moving average of 3 or 6 months may be appropriate.

Equation:

The following equation can be used to forecast the demand for milk in a future month using the moving average method:

Forecasted demand = Average of demand in the previous [number of months] months

Example:

Suppose the demand for milk in the previous 3 months was as follows:

Month 1: 10,000 gallons
Month 2: 11,000 gallons
Month 3: 12,000 gallons

Using the moving average method, the forecasted demand for milk in the next month would be:

Forecasted demand = (10,000 + 11,000 + 12,000) / 3 = 11,000 gallons

Justification:

The moving average method is a simple and effective way to forecast demand for products that have relatively stable demand patterns. It is also a good forecasting method for products that have seasonal demand patterns, such as milk.

Limitations:

The moving average method is not a perfect forecasting method. It can be less accurate for products with volatile demand patterns or for products that are new to the market. Additionally, the moving average method does not take into account other factors that can impact demand, such as changes in income or advertising spending.

Overall, the moving average method is a useful forecasting tool that can be used to forecast demand for milk in a future month.